The economic turmoil over the last several years has devalued pension plans in the defense industry and increased costs for the Pentagon, and those costs could worsen as the government tries to align two sets of pension rules, according to the Government Accountability Office (GAO).
Over the last decade, but largely because of the financial market meltdown in 2008 and 2009, the value of major pension assets has fallen, translating into a nearly 90 percent growth from 2008 to 2011 in pension costs for the largest defense contractors, the GAO said.
Under traditional pension plans, when the value of the assets drop, companies are required under a federal law known as the Employee Retirement Income Security Act of 1974 (ERISA) to make up for the losses by upping contributions. ERISA establishes the minimum contribution required to fund the plans.
The Pentagon has had to cope with some of the increases because contractors are permitted to factor pension benefits into what it charges the government–but with limitations.
Changes in those limitations, known as the Cost Accounting Standards (CAS), could see the Pentagon taking a bigger hit, the GAO said.
CAS determines how private pension plans can be applied by the private sector to government contracts. Typically, CAS allowances are lower than ERISA requirements, but in good economic times, when pensions are strong, that’s not significant. The differences, however, can be more profound when the economy is struggling and pension liabilities are on the rise, the GAO said.
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In 2011 the CAS board in the White House’s Office of Management and Budget (OMB) made changes to the CAS to harmonize them with the ERISA rules, according to the GAO. As CAS guidelines become closer to ERISA, that, coupled with a weakened economy, could increase how much contractors can factor into their government contracts and, therefore, could increase costs on the Pentagon, GAO said.
“Although pension cost projections are highly sensitive to economic assumptions, both contractors and DoD officials expect CAS pension costs to increase starting in 2014 due to harmonization,” the GAO report (GAO-13-158) released this week said.
“The CAS discount rates used to value liabilities will now be tied to the more volatile ERISA-based rates, making it harder to forecast future CAS pension costs and reducing the consistency of cost projections used on contract pricing,” GAO added.
The Pentagon and should clarify guidance on assessing reasonable pension rates and for determining cost projections, while the CAS board set a schedule for revising the parts to the Cost Accounting Standards that address settling pension plans, GAO said.